4 Ways to Play the Shipping Industry in the Face of the Gas Crunch

Key Points

• A global gas supply crunch, driven by the Ukraine and Iran conflicts, has created longer LNG voyage routes and higher freight rates benefiting certain shipping firms.
• Star Bulk Carriers and Diana Shipping offer differing dry-bulk exposure, with Star Bulk showing strong profitability and Diana providing steadier, charter-based cash flow.
• The Breakwave Tanker Shipping ETF has surged this year by tracking freight-rate futures, offering diversified but volatile exposure to the shipping industry.

Major disruptions to the energy space have had ripple effects that extend down to shipping firms around the world. A gas supply crunch may directly benefit some segments of the shipping industry—specifically, companies that can capitalize on soaring demand for liquefied natural gas (LNG) and related products. At the same time, higher costs combined with the threat of reduced exports could mean trouble.

With LNG benchmark prices climbing, there is growing competition for cargo across longer voyage distances, making for advantageous conditions for many shipping companies. Still, individual risk for these firms may be high, and it's crucial to distinguish between the firms most likely to benefit from a gas crunch and those that could face more negative repercussions. Those investors seeking higher upside potential but greater risk might consider an individual name, while those looking for diversified exposure might consider the Breakwave Tanker Shipping ETF NYSEARCA: BWET, one of this year's top-performing exchange-traded funds.

Shipping Miles Are a Major Macro Tailwind

The absolute price of natural gas is a factor in the rally among many shipping stocks this year, but perhaps the larger driver is the path LNG tankers must take to reach their destinations. European reliance on Russian pipeline gas fell dramatically due to the war in Ukraine, meaning that seaborne LNG had to make up much of the difference. Then, the Iran war threw the ecosystem into further disarray, limiting the number of vessels and forcing longer routes.

Star Bulk and Diana Shipping Stand Out as Dry Bulk Leaders

Dry-bulk companies—those transporting unpackaged, raw materials like coal and fertilizer—have not been as uniformly impacted by the current environment as LNG carriers. However, firms like Star Bulk Carriers Corp. NASDAQ: SBLK and Diana Shipping Inc. NYSE: DSX may continue to benefit, albeit for different reasons.

Star Bulk is a major dry bulk operator, overseeing one of the largest global fleets of vessels transporting iron ore, grains, industrial commodities, and more. Strong global commodity flows can strengthen demand for this company's services alongside broader shipping activity.

The company's profitability has been excellent, with net income of just under $150 million in the latest quarter, making a healthy dividend possible. Star Bulk also has a strong cash position of $565 million as of the midpoint of the year. SBLK shares are up about 58% year to date (YTD), but analysts still see some modest upside potential.

Diana Shipping, on the other hand, may be a more defensive alternative thanks to its longer-term charter agreements that tend to limit exposure to volatile spot markets. The company may be more likely to generate steady cash flow, even if it means giving up some possible upside when the freight market spikes. Diana has traditionally returned some of this value to shareholders with a dividend yield of 1.4%.

COSCO's Major Exposure Provides a More Holistic View of the Industry

Despite being officially blacklisted by the U.S. government, Chinese firm COSCO Shipping Holdings Co. Ltd. OTCMKTS: CICOF remains one of the largest shipping operators in the world.

Its view of the shipping industry is broad, encompassing container shipping, terminals, logistics, and other aspects of transportation. Global trade volumes drive this firm's business, not just energy-related shipping demand.

Investors may see the benefit of broader exposure being offset against potential risks with the U.S. market, though COSCO has claimed that its business is unaffected by being blacklisted.

BWET Is the Most Diversified Option

Having returned an unbelievable 4,200% YTD, BWET is one of the few ETFs providing access to the shipping industry, though in this case through freight-rate futures rather than exclusively shipping stocks. The performance of the fund is therefore tied to tanker market conditions.

Volatility comes along with this emphasis, as freight futures tend to fluctuate significantly due to geopolitical events, refinery maintenance, and even weather. This year, a combination of factors has sent freight rates climbing, a major boon for BWET. Still, there's no guarantee that this trend will continue.

For that reason, investors could see BWET as a broader way of accessing the industry even as the fund carries significant risks. It may make most sense as a short-term tactical vehicle for many investors, rather than a longer-term buy-and-hold name. That said, the longer that the gas crunch continues, the more freight rates—and, in turn, BWET—may rise.